Tuesday, December 4, 2012

Economic growth to contract to 3.8 per cent: IMF

Increasing political uncertainty, erratic monsoon and slower
services activity due to 'possible' slowdown of remittance growth, coupled with
spillover effects from declining growth in India will pull economic growth for
the current fiscal year down to 3.8 per cent against last fiscal year's 4.6 per
cent, according to International Monetary Fund (IMF)'s projection.
"The outlook for 2012-13 is challenging," it said, adding that
spillover effects from declining growth in India — through lower export demand,
weaker inward investment, and possibly less remittance — and the dampening
effect of continued political uncertainty will also present further challenges
to growth. "Inflation is also on the rise, and upward pressure on prices
may increase in line with projected developments in India over the next few
months."
After a team of IMF 2012 Article IV consultation meeting that visited Nepal on
November 16 submitted the report to the IMF board, the board focused on
downside macroeconomic risks and addressing financial sector vulnerabilities.
Though IMF welcomed improved macroeconomic performance and progress on
structural reforms despite the difficult political environment, it noted that
downside risks are increasing because of spillover effects from the slowing
Indian economy, a protracted political transition, and stresses in the
financial sector.
The IMF emphasised continued commitment to sound policies and structural
reforms, particularly in the financial sector to secure macroeconomic stability
and to foster sustainable and inclusive growth.
Likewise, it advised continued fiscal prudence, consistent with the objective
of keeping public debt roughly constant over the medium term. It also called on
the authorities to act expeditiously to pass a full-year budget for 2012-13,
and to strengthen public financial management to ensure full execution of the
capital budget.
It also stressed on the need to address quasi-fiscal liabilities arising from
financial losses at Nepal Oil Corporation and Nepal Electricity Authority, and
has urged the authorities to build consensus to gradually adopt an automatic price
adjustment mechanism — that it has been suggesting since long and which the
government has been delaying on due to some vested interests — while putting in
place well-targeted subsidies to protect the vulnerable.
IMF has also suggested reforms in the pension system, and tax and customs
administration. It has, though, commended the enhanced revenue mobilisation
efforts.
The IMF also emphasised on the need for a targeted and well sequenced
acceleration of financial sector reforms, including the amendment of NRB Act to
improve the governance of the financial sector and the broadened prompt
corrective action framework to address underlying vulnerabilities and to
strengthen the system.
Enhancing supervision and improving the quality of data will also be necessary
for increasing financial sector stability, it said, also suspecting the
reliability of reported data.
The IMF has called for further progress on AML/CFT framework and hailed the
authorities’ interest in the Financial Sector Assessment Programme.
The IMF considered that a tightening of monetary policy appears warranted to
signal commitment to price stability and support the exchange rate peg, which
has served the country well, and also agreed that open market operations and
regular auction of T-bills should be used to mop up excess liquidity.
However, the IMF concurred that accelerating the pace of structural reforms
will be important to address competitiveness challenges, and achieve higher and
more inclusive growth. "Efforts should focus on enhancing the business
environment, removing infrastructure bottlenecks, increasing transparency, and
improving governance," it suggested.
The central bank has, however, projected an economic growth of 4.67 per cent
for the current fiscal year, despite poor harvest due to the late monsoon and
shortage of chemical fertilisers during the harvesting season, and also despite
the lack of a budget that could have helped the economy grow.

Growth rate
2009-10 — 4.8 per cent
2010-11 — 3.9 per cent
2011-12 —4.6 per cent2012-13 — 3.8 per cent
(Figures for fiscal year 2011-12 is an estimate, and for fiscal year 2012-13 a
projection. Source: IMF)